Teaching Elephants to Dance:

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Teaching Elephants to Dance

• Financial Metrics for Non-Financial Executives
• Dan Ruchman
• May 18, 2009

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What is Business?

• Organized
• Delivery of products or services
• Agreed upon price
• Value for value
• Profit

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What makes for Success?

• Mission
• Vision and Values
• Goals
• Plans
• People
• Is that all?

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Success the Intangibles

• Desire
• Communication
• Analysis
• Focus
• Wisdom

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What Well Talk About

• Accountants - Who you are
• Non-accountants what they do, and why dont
  they care?
• Metrics Management
• The opportunity
• When the band plays together the company being
  all it can be.

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Accounting -- Balance

• Does this give you comfort?

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• The accountant,
• The friend, and . . .
• The dinosaur

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Who are You?

• Accountants
• Why you do what you do
• Measuring
• Communicating
• Impacting the bottom line

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Who are THEY?

• Non-accountants
• RD
• Marketing
• Manufacturing
• Sales
• General Management

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Non-accountants

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BABEL?

• Do we all speak different languages, like the
  Tower of Babel, destined for confusion,
  miscommunication, miscues, missteps and costly
  errors?

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Language of the Universe

• La matematica è l'alfabeto nel quale Dio ha
  scritto l'universo.
• Galileo Galilei

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Language of Business

• La finanza è la lingua nel quale Dio discute
  degli affari.
• Finance is the language of business.

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Language of Finance

• PL
• Balance Sheet
• Cash Flow
• Financial Ratios
• Footnotes
• Investor info, trends, other numeric but
  non-financial things

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PL or Income Statement, or Stmt of Operations,
or Statement of Earnings

• How much did we sell goods services
• What did it cost us?
• Did we make money?
• Is our business growing?
• Is our profitability good, bad, improving?

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Basic PL
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PL A lot of terms in a short amount of time

• PL the income side
• P
• L
• Income
• Sales gross, net, etc.

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More PL - Costs

• Product costs Fixed, Variable
• Standard, process, total
• Semi-Fixed
• FOH
• VOH
• Internal costs vs vendor costs
• Outsource vs buying from sister co
• Distribution, warehousing

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More PL Expenses

• Marketing
• Selling
• RD
• GA
• The Power of Definitions
• Adding value with metrics

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PL Terms Ratios

• Profit Margin?
• Gross Margin
• Operating Margin
• Contribution Margin
• Pre-tax vs Post-tax
• EBITDA

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A word on EBIT

• . . .Earnings Before Irregularities and Tampering?

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Another Word on EBITDA

• Earnings Before I Tricked the Damn Auditor

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A Final Word on EBITDA

• Earnings Before
• Interest
• Taxes
• Depreciation
• Amortization
• . . . and it MEANS?

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EBITDA

• A popular metric designed to focus on the core
  operations of the company, excluding non-cash and
  other items beyond the control of the operating
  side of the business.
• and some CAVEATS

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Key PL Metrics

• Sales growth year-over-year
• Earnings growth year-over-year
• Gross profit margin percentage
• Operating expense of sales
• Profit Margin Operating, and Net

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Risk versus Reward

• The basic concept If you take on more risk,
  you should only be doing it if you stand a chance
  of getting a higher reward.

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More on Risk Reward

• The grocery business
• The restaurant business
• The mob

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Return A Holy Grail
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Balance Sheet

• What do we own?
• What do we owe?
• Are we financially strong?
• How does our financial position compare with last
  year?

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Basic Balance Sheet
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Balance Sheet - Terms

• ASSETS
• Current Assets
• Accounts Receivable
• Inventory
• Intangible Assets
• Fixed Assets
• Depreciation

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Balance Sheet The Other Side

• LIABILITIES
• Current Liabilities
• Accounts Payable
• Long Term Debt
• Convertible Debt
• Off-Balance Sheet Debt

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Balance Sheet Equity

• EQUITY
• Stock Common vs Preferred
• Retained Earnings
• Diluted stock ownership options

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Balance SheetKey Metrics

• Liquidity measures
• Current Ratio
• Quick Ratio
• Debt-to-Equity (D/E)
• Negative Equity

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Cash Flow

• How much did we start the year with?
• How much did we end the year with?
• Where is cash being used, and from where is cash
  coming in?

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Cash Flow Key Terms

• Free Cash Flow
• EBITDA
• Cash Positive
• Cash Negative
• Capital Intensive
• Cash Burn Rate

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Cash Flow Key Issues

• Burn rate vs Cash Balance vs Earnings
• Future capital spending needs
• Cash from sale of stock When? Why?
• Paydown of debt When? Why?

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Other Key Metrics

• Return on Assets (ROA, RONA, RNOA)
• Return on Equity (ROE)
• Earnings per share (EPS)
• Price/Earnings Ratio (P/E)
• Free Cash Flow Be careful!
• Inventory turnover

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Concepts

• Accuracy versus Precision
• Information is Power Share it
• Know Your Audience
• Thinking The Box
• The Price of Miscommunication
• The Opportunity

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Thinking Inside, Outside, Through the Box

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A Story

• 19th Century Shoe Salesmen

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Questions to be Answered

• Is the company financially sound?
• Has the right degree of financial savvy?
• Right balance of bottom line focus vs market
  share vs growth vs customers, vs?
• Would I invest in this company?

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• The Price
• The Challenge
• The Opportunity

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Galileo Updated for Business

• Mathematics is the language by which God has
  written the universe.
• Galileo
• Todays reality Finance and accounting are the
  language by which business writes and measures
  its successes and it failures.

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Why Youre Here

• "You are not here merely to make a living. You
  are here in order to enable the world to live
  more amply, with greater vision, with a finer
  spirit of hope and achievement. You are here to
  enrich the world, and you impoverish yourself if
  you forget the errand."
• -- President Woodrow Wilson

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Teaching Elephants to Dance

• Financial Metrics for Non-Financial Executives
• Dan Ruchman
• Ruchman Associates
• Creative and Intelligent Solutions for
  Finance,
• Operations Strategy.
• ? Lighting the Path to Profitability ?
• Office 858.784.0104
• Dan.Ruchman_at_RuchmanAndAssociates.com